There are a number of reasons a corporation may need to determine whether its cash is used principally in an active business. Examples include the following:

• Whether it is a small business corporation (so, for example, Section 74.4 does not apply to deem holders of certain shares and loans to realize income on those investments; see VTN 416(10)).

assessing whether cash is used in an active business 

• Whether its shares are shares of a qualifying small business corporation (so, for example, they might be eligible for the capital gains exemption (Section 110.6)).
• Whether any income on the funds falls within the proposed passive income rules (see VTN 439(6) and 440(5)), or is incidental to an active business and, therefore, is not income from property (defined in Subsection 129(4)).
• Whether the corporation is a specified small business corporation (Regulation 4901(2)) such that its shares would be qualified investments for an RRSP.

In a January 25, 2018 Technical Interpretation (2017-0717561E5, Doiron, W.), CRA was asked whether cash held by a corporation would be considered “used in an active business”. The situation reviewed involved a corporation in a start-up phase which used a portion of funds raised to cover business expenses, holding the remainder for the purchase of business assets, and the concern was whether the corporation would not be a specified small business corporation.

CRA noted that it would first be necessary to determine whether business had commenced, a question of fact. CRA referred to Interpretation Bulletin IT364, Commencement of Business Operations, for further details of the factors they would consider.

The determination of whether cash or near-cash assets are used in an active business is also a question of fact. CRA offered the following general views:

• If the withdrawal of the cash or near cash property would destabilize the business, this indicates it is used in the business.
• Cash which is temporarily surplus to business needs, and is invested in short-term investments, may be considered used in the business.
• Cash balances which accumulate and then are depleted due to annual seasonal fluctuations of an ongoing business will generally be considered used in the business.

 the cash flow cycle of the business

• A permanent cash balance in excess of reasonable working capital requirements would generally not be used in active business.
• Accumulation of funds in anticipation of purchase or replacement of capital assets, or repayment of long-term debt, will not generally qualify the funds as being used in the business.
• Prudent financial management requires maintaining current assets (including inventory and accounts receivable, in addition to cash and near-cash assets) in excess of current liabilities, and this could support the use of cash in an active business; however, this would not include cash held to offset the non-current portion of long-term liabilities.
• Where cash or near-cash assets fulfill a business requirement (e.g. certificates of deposit a supplier requires be maintained), such property would be used in the active business.

CRA stressed that these views were general in nature, and all relevant facts and circumstances must be reviewed for any specific situation, including the actual use of the cash, the nature of the business, and ordinary practice in the particular industry.